This Dow Jones Stock Is a Genius Buy for Dividend Growth

The Dow Jones Industrial Average is one of the most followed stock market indexes in the United States; it contains 30 of America’s largest and best-known companies. That includes industrial conglomerate Honeywell International (HON -1.13%). You might be familiar with Honeywell; the company has its name on some thermostats and other residential products, but most of its business is in industrial and aerospace applications.

It’s time to get more familiar with Honeywell; it could be a sneaky good dividend stock over the coming years. But don’t take my word for it; here is the hard evidence that Honeywell could be a winner in your portfolio.

There’s more where that came from

Honeywell isn’t exactly new to the dividend scene; the company’s already raised its dividend for 12 consecutive years, following a freeze enacted during the financial crisis in 2009-2010. The dividend yield is solid at just under 2%. It’s enough to add some income to your portfolio, but the growth is probably what you own the stock for. The payout has increased by an average of 8% annually over the past five years, enough to outpace inflation (when it’s not at its highest rates in decades).

HON Cash Dividend Payout Ratio data by YCharts

Honeywell has had a busy past few years; it restructured in 2018, spinning off a portion of its business as Resideo Technologies and Garrett Motion. The pandemic hit shortly after, which brought supply chain headaches hit the entire sector. You can see above how the drop in revenue has pushed the dividend payout ratio higher. Fortunately, it remains more than enough to cover the dividend.

Honeywell could be in a better position soon; the company’s been investing in growth these past few years and touted strong activity in key end markets like aerospace and performance materials and technologies. Investors should look for that payout ratio to decrease over the coming years. Analysts believe the company will grow earnings per share (EPS) by 9% annually over the next three to five years. Therefore, if it hits these growth estimates, management could hypothetically continue raising its dividend in high single-digit increments.

Looking further out

If you’re a long-term investor who wants to benefit from the power of compounded returns over decades, you’ll want to pay attention here. Honeywell’s business seems aligned with growing markets. Approximately 65% of its sales are in aerospace, energy, and non-residential end markets. This includes applications like defense and space, commercial aviation, automation for buildings and factories, and warehouse technologies.

About a third of Honeywell’s business is in aerospace; it estimates that 90% of global aircraft use its avionics, and 80% of satellites in orbit have Honeywell components. According to Straits Research, the aerospace-parts manufacturing industry was valued at $754 billion in 2021 and could grow to $1.1 trillion by 2030. The company should capture a portion of that growth, and that’s just one industry from several that Honeywell sells into.

When to buy the stock?

If there’s a knock on Honeywell right now, it’s the stock’s valuation. Wall Street has smiled on Honeywell’s solid growth and fundamentals, trading the stock near its 52-week high and at a forward price-to-earnings ratio (P/E) of 22. Honeywell has historically traded at a premium to the broader market, averaging a P/E of 25 over the past decade versus the S&P 500‘s historical average of 16.

Honeywell may need to continue performing at a high level to maintain this premium; its growth outlook is similar to the S&P 500‘s historical long-term growth rate of about 10%. Coming up short of expectations could result in a lower valuation from Wall Street that would hurt investment returns.

HON PE Ratio (Forward) data by YCharts

Honeywell is a growing blue-chip stock with a dividend that could make you look smart over the long term. However, please don’t rush to buy the stock today; investors are well aware of Honeywell’s attributes, so it might pay to wait to buy shares until some market turbulence offers a better deal on shares. Otherwise, a dollar-cost averaging strategy will help you buy slowly, letting Honeywell’s growth steadily burn off the stock’s valuation over time.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.